Quick answer
The cash flow ratios worth tracking are the current ratio, quick ratio, debtor days, creditor days, stock days and the debt service coverage ratio. Together they show whether you can pay short-term bills, how fast customers pay, how long your money is tied up and whether profits cover loan repayments. Check them quarterly and against your own history first, then against your industry.
Key points
- Six ratios cover most of what an owner and a lender need: current, quick, debtor days, creditor days, stock days and debt service cover
- A ratio is only meaningful against your own trend and your industry, so record it each quarter
- The ATO publishes small business benchmarks by industry, a free yardstick for cost of sales to turnover
- Lenders typically read the debt service coverage ratio with the bank statements, since one is a forecast and the other is proof
- Debtor, creditor and stock days together add up to your cash cycle, the number that sets how much working capital you need
Your accountant hands you a set of accounts once a year. By then, the story they tell is months old. Ratios turn the same numbers into a dashboard you can read in ten minutes each quarter, and they are the same measures a credit assessor reaches for when they first open your file.
You don’t need to memorise formulas. You need six, applied to figures you already have, with a note of the answer each time. Over a few quarters the pattern tells you things your bank balance won’t.
Why track ratios when I can see my bank balance?
A bank balance is one number on one day. It cannot tell you that customers are slowly taking longer to pay, that stock is piling up, or that a new loan takes repayments past what profits can bear. Ratios surface those drifts early, while there is still time to act.
They also give you a common language with lenders. When an assessor says “your debtor days stretched”, you want to know what that means and whether it’s true.
Ratio 1: the current ratio
Formula: current assets ÷ current liabilities.
It asks whether what you own and will convert to cash within a year covers what you owe in the same period. Business.gov.au describes current assets as those you can turn into cash within a year, such as cash, inventory and prepaid expenses, and current liabilities as items like accounts payable and accrued wages.
With $210k of current assets and $150k of current liabilities, the ratio is 1.4. Below 1 suggests short-term pressure; well above 1 is generally comfortable, though a very high number can mean idle cash or slow stock. Compare yourself with the same quarter last year.
Ratio 2: the quick ratio
Formula: (cash + debtors) ÷ current liabilities.
This is the current ratio with stock removed, because stock can take time to sell and sometimes sells for less than its book value. If your current ratio is healthy but your quick ratio is thin, you are relying on stock to meet your bills. For a business with slow-moving lines, that is a meaningful warning.
Ratio 3: debtor days
Formula: trade debtors ÷ credit sales × 365.
How many days, on average, customers take to pay. If you are owed $90k and your credit sales are $720k a year, debtor days are 45.
The useful comparison is with your terms. Offering 14-day terms and collecting at 45 days means you are lending customers money for a month longer than you agreed. Pull an aged receivables report and see whether the problem is everyone slightly late or one or two large accounts. Our guide on getting customers to pay faster goes through the fixes, and the glossary has a short entry on debtor days.
Ratio 4: creditor days
Formula: trade creditors ÷ credit purchases × 365.
The mirror image: how long you take to pay suppliers. A higher number helps your cash, up to a point. If you’re stretching suppliers well past terms, you may risk goodwill, early-payment discounts or supply. If you pay at 10 days while collecting at 45, you are funding the gap from your own pocket.
Ratio 5: stock days
Formula: average stock ÷ cost of sales × 365.
How long stock sits before it sells. A hardware store with $180k of stock and $900k annual cost of sales holds 73 days of stock. Add that to debtor days, subtract creditor days, and you have the cash cycle, which is the number of days your money is out of the bank.
| Item | Days |
|---|---|
| Stock days | 73 |
| Debtor days | 30 |
| Creditor days | 35 |
| Cash cycle | 68 |
If daily costs are about $3,000, that business needs roughly $204k to keep the cycle turning. It is the same logic explored in working capital explained.
Ratio 6: debt service coverage ratio
Formula: income available for debt repayments ÷ total annual repayments.
Often shortened to DSCR, this is the ratio lenders look at hardest, because it answers the question they care about: can the business carry the repayments? For many small businesses, “income available” is net profit plus depreciation, interest and any one-off costs. If that figure is $180k and annual repayments (existing plus proposed) are $120k, DSCR is 1.5.
A result of 1.0 means there is nothing spare. Above 1, you have headroom for a bad quarter. The debt service coverage ratio calculator lets you test a proposed loan before you apply, and our glossary explains DSCR in a sentence or two.
Thinking about a loan and want a second opinion on your figures? A short enquiry is a quick way to get one.
What about margin ratios?
Cash flow ratios sit next to margin ratios. Two are worth adding to your list:
- Gross margin: (revenue − cost of sales) ÷ revenue. It tells you if your pricing works.
- Cost of sales to turnover: the ATO’s key benchmark. Divide cost of sales by turnover and multiply by 100. The ATO’s example works out a business with $137,983 cost of sales on $456,790 turnover at about 30.21%. The ATO publishes ranges by industry and turnover band, and says that if you fall outside your range there may be room to improve. Use it as a guide, not a verdict.
For the longer view of profitability, see how to read your profit and loss statement.
How do I put this together each quarter?
- Download the profit and loss, balance sheet and aged debtors and creditors reports at quarter end.
- Write the six ratios in a simple table, one column per quarter.
- Circle any that moved more than 10% in the wrong direction, and ask why.
- Look at the cash cycle, and ask which of the three components is easiest to shorten.
- Keep the table. Three or four quarters of results are worth more than any single figure, and a lender can see them as evidence of control.
If you’re not sure where a number comes from, your accountant can usually produce it in a few minutes. The balance sheet guide shows where each balance-sheet figure lives.
What do I do when a ratio looks bad?
Identify which lever is moving it:
- Current or quick ratio low: increase cash, reduce short-term debt, or convert some short-term borrowings into a longer term.
- Debtor days high: invoice earlier, tighten terms, chase at day one and consider invoice finance for large accounts.
- Stock days high: clear slow lines and reorder in smaller quantities.
- DSCR low: improve profit, extend the loan term to reduce repayments, or lower the amount you borrow.
Some of those fixes can be made yourself. Others, such as smoothing cash against slow invoices or restructuring debt, involve a finance product.
Bring the numbers to a conversation
Once you’ve worked out your ratios, you know more about your business than most applicants know about theirs. That is a good position to start from, whether you’re asking a bank or looking at other options.
If you’d like a real person to look at the figures, send us a short enquiry. It takes around a minute, and since there’s no credit check at this stage your score isn’t affected by asking. We keep your details to ourselves rather than blasting them to a long list of lenders. Someone reads what you’ve sent and calls you. Enter your numbers as accurately as you can, as that helps us find the best fit on the first try.
Frequently asked questions
What is a good current ratio for a small business?
Above 1 generally means short-term assets cover short-term liabilities, and many lenders like to see a margin comfortably above that. But the right level depends on the industry. Retailers who sell for cash can run lower, while trades and wholesalers with debtors and stock usually need more headroom.
How do I calculate debtor days?
Divide your trade debtors (accounts receivable) by annual credit sales and multiply by 365. If you are owed $90k and make $720k of credit sales a year, debtor days are 45. Compare that figure with your payment terms: if you offer 14 days and customers take 45, the gap is costing you working capital.
What is the debt service coverage ratio?
It is the income available to pay debt divided by the total debt repayments due, typically over a year. A result of 1.0 means income exactly covers repayments. Lenders generally want a figure above 1, often with room to spare, so that a dip in earnings doesn't threaten repayment.
How often should I calculate these ratios?
Quarterly is a good rhythm for most small businesses, lined up with your BAS and accountant's reports. Monthly makes sense for debtor days if collections are a worry. The value comes from the trend, so keep a simple spreadsheet with each quarter's result.
Do lenders use these ratios?
Many do, though the exact set varies. Debt service cover and the current ratio are the most common, with debtor days and stock days used where invoice finance or stock are involved. Some lenders weigh bank statements more heavily and use ratios as a cross-check.
Where can I find industry benchmarks?
The ATO publishes small business benchmarks for over 100 industries, showing typical cost of sales to turnover ranges by turnover band. They are useful to see whether your margin sits inside the normal range, and the ATO itself says to treat them as a guide.